It’s April 16 and most of us survived another tax season. Were you happy with your refund or did you have to pay in more than you have in the past? If your refund was too big, or you had to pay in a lot, you may wish to revisit your Form W-4.

Every time you earn income, you’ll most likely owe state and federal income tax.  Your Form W-4 determines how much tax is withheld from your paychecks. Your employer deducts taxes based on the number of allowances you claim on your W-4. This system works well if you’re a “standard” taxpayer who files single, has one job, and claims a standard deduction.  But if you don’t fit into this category—and many of us don’t—it’s likely that you have too much or too little tax withheld.

Workers complete form W-4 when they start a job. For many people, that is the last time they pay attention to it. Has there been a change in your household – did you add a child, get married or have a divorce, change jobs or did your spouse get a job?  Any of these changes may impact your tax status; that means reviewing your form W-4 is a good idea. In addition, changes in tax law may affect your ultimate tax bill; after passage of the most recent federal tax bill in late 2017, some workers consulted with the payroll office of their employer to review their allowances.

When you have too much money withheld from your paychecks, you end up giving Uncle Sam an interest-free loan (and getting a tax refund). Ask yourself if there are better ways to use that money. Why not take home more money in your weekly paycheck? Or invest the proceeds and earn interest on it?  On the other hand, having too little withheld from your paycheck could mean an unexpected tax bill or even a penalty for underpayment. Either way, there’s a better way to manage your hard-earned money.

The key to having the right amount of tax withheld is to update your W-4 regularly.  Do this whenever you have a major personal life change. For people who wish to avoid providing that interest free loan to the government, the goal is to file a tax return with zero refund and zero owed. While it is rare to get an actual zero as a result, these folks are generally happy if they either owe a small tax bill or receive a small tax refund. If you count on a big tax refund every year, you should also pay attention to your withholding, because how much you have withheld directly impacts your refund.

Is it time to call your employer’s payroll office?

Susan Taylor

Resources are important whether you are looking to rent your first apartment, pay your bills, buy your first home or send your child to college. There are many ways to save money to reach your goals, and hopefully ISU Money Tip$ will be one of them. I enjoy traveling, needlework and am a novice gardener.

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Medical costs are often misunderstood and missed on tax returns. The most common misconception, which I hear as a volunteer preparing taxes at the VITA sites, is the belief that the full dollar value is going to be used to reduce income. There is a threshold that you have to pass before any expenses will be counted. Ten percent of your adjusted gross income is the threshold. You can estimate what your threshold will be by looking at last year’s 1040 line 37: if it shows an amount of $40,000, then there is no need to report your medical expenses if they are less than $4,000.

I also find that not everyone knows what is an allowable expense. Over the counter drugs and expenses that were paid with funds from a Flex account or HSA don’t count. On the other hand some expenses are overlooked: mileage to and from a medical appointment, meals and lodging are the most common. The allowance per mile is $.19, not huge, but it can add up if you live in a rural area and are referred to a specialist or clinic in another community. Lodging and meals at a hospital are allowed for parents and other adults when essential for medical care. If the lodging is not at the hospital you are allowed $50 per person, but not meals.

Start now, as a new year has begun, to keep a log of medical expenses, including a record of trips, even if it turns out that you aren’t able to use them on your tax return. No one knows what the coming year holds – a 12 month period can include emergencies and unexpected costs. At the end of the year it will be better to have the data on record than to have to dig for the information.

For a complete list of allowable expenses check out IRS Publication 17 (pdf), Your Federal Income Tax Guide; medical expenses are included in Chapter 21.

Joyce

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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